Qualified Improvement Property (QIP) refers to certain interior improvements made to nonresidential buildings after the property has already been placed in service.
These upgrades commonly occur when businesses renovate commercial spaces such as retail stores, offices, hotels, hospitals, manufacturing facilities, and banks. Residential properties, including single-family homes, condos, townhomes, and apartment buildings, generally do not qualify.
One of the main tax benefits of QIP is its favorable depreciation treatment. While most nonresidential real property must be depreciated over 39 years, QIP generally has a 15-year recovery period, allowing businesses to recover renovation costs faster. Accelerated recovery helps improve short-term cash flow and can make large renovation projects more financially attractive.
Earlier tax rules created multiple improvement categories, including Qualified Leasehold Improvements Property (QLIP), Qualified Retail Improvement Property (QRIP), and Qualified Restaurant Property (QRP). The Tax Cuts and Jobs Act consolidated these categories into one classification called QIP. This change simplified the rules for many taxpayers.
Common Qualified Improvement Property examples include installing interior walls, flooring, lighting, drywall, drop ceilings, and interior plumbing or electrical wiring. Because these assets are separate from the structural building shell, they can often be identified through cost segregation studies and assigned shorter recovery periods.
To qualify as Qualified Improvement Property, the improvement must meet several requirements under federal tax rules.
First, the improvement must be made to the interior of a nonresidential building. The building must already be in service before the improvements are completed. Renovations that occur before the building is operational typically do not qualify for QIP treatment.
Second, certain types of improvements are specifically excluded. These include:
For example, adding an extra wing to a building would not qualify because it increases the building’s size. However, remodeling the interior space without changing the building’s footprint may qualify.
Common qualifying improvements include HVAC upgrades, interior heating and ventilation systems, drywall, lighting, and security systems. Mixed-use buildings may also qualify in part. For example, a building that includes both retail and residential space may qualify for QIP treatment only for the commercial portion.
Understanding these eligibility requirements is important because misclassifying improvements can significantly change the allowable improvements depreciation life and delay tax deductions.
Qualified Improvement Property (QIP) is eligible for bonus depreciation because it has a 15-year MACRS recovery period, which qualifies under Internal Revenue Code Section 168(k).
Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation was scheduled to phase down from 100% (through 2022) to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026 before ending in 2027.
However, the One Big Beautiful Bill Act (P.L. 119-21, 2025) restored 100% bonus depreciation for property acquired after January 19, 2025. As a result, 2025 has two possible rates:
Businesses often combine cost segregation strategies with leasehold improvements bonus depreciation to maximize deductions. By identifying assets eligible for accelerated recovery periods, companies may deduct a significant portion of renovation costs in the year the improvement is placed in service.
Section 179 expensing and bonus depreciation both allow businesses to accelerate deductions, but they function differently.
Section 179 allows taxpayers to elect to immediately expense certain property rather than depreciating it over time. For example, the Section 179 deduction limit was $1,080,000 in 2022, though this amount is indexed for inflation. However, Section 179 deductions are limited by taxable income and generally cannot create a tax loss.
Bonus depreciation does not have the same limitation. Businesses may claim bonus depreciation even if it produces a net operating loss. This flexibility often makes bonus depreciation a more powerful tool for companies undertaking large renovation projects.
Certain building components such as roofs, HVAC systems, fire protection systems, and security systems may qualify for Section 179 treatment. Determining which option produces the best outcome depends on projected income, tax rates, and future investment plans.
Professional analysis is often valuable in these situations. Bennett Thrasher’s Tax Credits & Incentives Services team can help evaluate capital improvements and determine the most effective depreciation strategy.
Many taxpayers historically depreciated QIP incorrectly because of earlier legislative issues and misunderstandings of the rules. In some cases, improvements were depreciated over 39 years instead of the correct 15-year recovery period.
Fortunately, the IRS allows businesses to correct these mistakes. One common solution is filing Form 3115, Application for Change in Accounting Method, which allows taxpayers to adjust depreciation schedules and claim missed deductions.
In other situations, amended returns may be necessary to correct prior-year filings. IRS guidance, such as Rev. Proc. 2020-25, provides procedures that allow taxpayers to retroactively claim additional depreciation when QIP was improperly classified.
Qualified Improvement Property generally includes interior improvements made to commercial buildings after they are placed in service. Examples include interior walls, ceilings, flooring, lighting systems, and certain plumbing or electrical upgrades. The improvements must be inside the building and cannot involve enlarging the structure or modifying the internal structural framework.
No. Structural expansions that increase a building’s size or volume do not qualify as QIP. Treasury regulations define enlargement as an increase in the building’s total volume. Interior remodeling that rearranges existing space may qualify, but additions that increase the building’s footprint generally do not.
For tax purposes, Qualified Improvement Property is typically depreciated over a 15-year recovery period using the straight-line method. This shorter recovery period allows businesses to deduct renovation costs much faster than the standard 39-year depreciation required for most commercial buildings.
Yes. Qualified Improvement Property (QIP) qualified for 100% bonus depreciation for assets placed in service through 2022, and under the One Big Beautiful Bill Act of 2025, assets placed in service after January 19, 2025, continue to qualify for the full 100% deduction with no phase‑out.
While the definition of Qualified Improvement Property is consistent, the tax impact may differ depending on a taxpayer’s financial situation. Factors such as taxable income, eligibility for Section 179 deductions, accounting methods, and state tax rules can influence how depreciation is claimed and which strategies provide the greatest benefit.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Zack Leder, partner in charge of Bennett Thrasher’s Business Tax Practice, or call us at 770.396.2200.
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